At issue is a proposal to award a $7,000 tax credit to people who buy foreclosed homes or homes on which foreclosure has been filed, one piece of a broader measure that awards tax breaks to home builders and banks yet offers little for families in foreclosure.

The $7,000 credit is aimed at helping get foreclosed homes off the market, thereby stabilizing home prices and keeping blighted houses from dragging down neighborhoods.

However, economists say that making it easier to buy foreclosed homes makes it easier to sell them. Banks could be more inclined to foreclose on a house instead of renegotiating new terms with a homeowner behind on their payments.

At the same time, economists say, the $7,000 credit could distort the market by making foreclosed homes owned by lenders more attractive to buy than other homes. That has the effect of lowering the value of homes occupied by people who are up to date with their mortgages.

"A bank that owns a foreclosed house will get a big selling-price advantage over the single mom who lives next door and has been faithfully paying off her loan," says Howard Gleckman of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

"Indeed, because lenders would expect a higher price when they put a foreclosed house on the market, such a law might even encourage banks to repossess properties more quickly," Gleckman adds.

Proponents of the idea reject the critique.

"All these houses in foreclosure are doing a whole lot more damage to the (house) value of the homeowner who's making their payments than having a $7,000 tax credit to induce people to absorb those foreclosures," counters Sen. Johnny Isakson, R-Ga. "It helps you to fix the bottom of the market so the market can turn around."

The Bush administration opposes the foreclosure purchase tax credit, though it's been circumspect in its public statements. In an unusual step, the White House did not issue an official policy statement as it does with most important legislation.

"Some of the proposals we've seen might have the potential to distort the market," said Treasury Department spokesman Andrew DeSouza.

While people entering the housing market would benefit from the $7,000 credit, as would lenders owning big stocks of unoccupied, foreclosed homes, it would do nothing for people who have already lost their homes or are threatened with foreclosure.

"What this does is not to help anyone who has problems with their mortgage. All this does is to make those homes easier to sell once the home has gone into foreclosure," said David John, an economist for the conservative Heritage Foundation. "It benefits the lender. It doesn't benefit the borrower."

"Foreclosed and vacant houses are a blight on the neighborhood. They drag down home prices," said Finance Committee Chairman Max Baucus, D-Mont. "Congress should encourage people to purchase those properties. That would help stabilize home prices and get the housing industry back on track."

The $7,000 tax credit has a relatively small cost of $1.6 billion over the next several years. The same can't be said of a plan that awards home builders, lenders and other money-losing businesses a big tax break.

That provision, dropped from February's stimulus measure after critics said it was unlikely to generate substantial new investment, would permit home builders and other businesses absorbing heavy losses now to reclaim taxes paid when times were good.

The so-called operating loss carryback plan would lengthen from two to four years the period for which businesses suffering losses can reclaim previously paid taxes. It would cost $25 billion through 2010, though its price tag falls to $6 billion over a 10-year window.

House Democrats aren't planning to include either the foreclosure tax credit or the business tax refunds in a housing bill they expect to start putting together this week.

Meanwhile, the bill contains another provision that would allow people who don't itemize their deductions claim a $500-$1,000 deduction on their property taxes. It would chiefly benefit homeowners who have paid off their homes and can't claim a deduction on mortgage interest.

But people who have paid off their homes are, by definition, not at risk of foreclosure, critics say. Most have also built up considerable equity in their homes over the years, despite the recent downturn.

In addition to these provisions, senators are scrambling to add others. Some are connected to the crisis, but others are not, such as a plan by Sens. Maria Cantwell, D-Wash., and John Ensign, R-Nev., to add $6 billion worth of tax breaks for renewable energy producers.

Sen. Ben Cardin, D-Md., wants to give a temporary $7,000 credit to first-time home buyers to try to boost the housing market.

Sens. Bill Nelson, D-Fla., and Norm Coleman, R-Minn., are pressing to let homeowners who are late on their mortgage payments withdraw money penalty-free from their retirement accounts to avoid foreclosure.

Enlarge By Steve Marcus, USA TODAY Some economists critical of a Senate bill meant to ease the foreclosure crisis might actually encourage it by creating incentives for banks to foreclose on homes instead of renegotiating new terms with homeowners.

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